The stock market is making new highs while the U.S. economy picks up and unemployment falls. Is that enough to nudge the Federal Reserve toward the exit from ultra-low interest rates? Fed Chairman Ben Bernanke took the stage today, after a Federal Open Market Committee meeting, to give us hints.

Welcome back as we take you through the exciting twists and turns of another Federal Reserve press conference. We’ll bring you the central bank’s latest economic projections followed by the wizard himself, Fed Chairman Ben Bernanke, who today is very glad not to be the Cypriot central banker.

If you’re keeping score at home: We’re six months into the Federal Reserve’s latest bond-buying program and 51 months into near-zero interest rates from investors’ favorite central bank.

Will anything change? Certainly not today. But we’ve all heard the rumblings from some corners of the Fed system about perhaps someday talking about maybe raising interest rates just a little bit, eventually, down the road into the future. That seems to have been enough to send investors’ blood pressure up at regular intervals, before they calm down enough to create a new record in the Dow Jones Industrial Average.

Bernanke’s message today is easy to predict: We’re staying the course, for now. Unemployment remains high and growth remains slow, with threats on the horizon from U.S. budget cuts to a euro-zone meltdown.

Remember: This is a man of steely resolve who wouldn’t raise rates in mid-2008 even as the price of oil approached $150 a barrel. That decision looked pretty good a few months later as deflation threats arrived with the financial crisis.

He’s not going to allow anyone to spike the punch bowl now, just 10 months before his term as chairman ends. But he just got out of a meeting where more than a couple of FOMC members were talking about bubbles, inflation in their districts and all sorts of worrisome things as the economy looks like it’s taking off.

Federal Reserve officials expect a slightly slower pace of growth and lower unemployment over coming years, in forecasts that also show a strong majority still expects the first interest rate hike to come in 2015.

The central bank’s views were made public Wednesday as part of the release of its economic and monetary projections for the next few years. The outlook is based on the responses of the 19 members of the monetary policy setting Federal Open Market Committee.

The Fed’s forecasts are released in conjunction with the policy statement announcing the outcome of the FOMC meeting held over Tuesday and Wednesday.

In their forecasts, central bankers expect the U.S. economy will expand by 2.3% to 2.8% this year, and by 2.9% to 3.4% in 2014 and 2.9% and 3.7% in 2015. Those forecasts were revised slightly lower compared to projections prepared in December.

While the Fed could have gone further in acknowledging the economic strength reflected by the past few weeks of U.S. data, Omer Esiner, chief market analyst at Commonwealth Foreign Exchange says the statement “won’t overshadow the negative sentiment coming from the euro zone, nor damage the view that the U.S. recovery is outpacing that of its rivals.”

The most the euro will get out of this is “maybe a move to $1.30 or slightly above, and that’s all,” Mr. Esiner adds. It’s now at $1.2940 right now, up 0.5%.

About the Fed’s decision to keep QE3 cranking in full force: “The Fed will keep the punch bowl in its pocket for the next few months. The valuation in Treasury bonds is stretched, but the Fed keeps buying, which will continue to keep” the 10-year yield between 1.85% and 2.25% for the foreseeable future, said Jason Evans, co-founder of hedge fund NineAlpha Capital.

Ten-year note off 9/32 in price, yielding 1.941%, from 1.946% before the statement. (Prices rise as yields fall.)

As the great Phil Izzo shows us, the Fed’s post-meeting statement offered few changes from its prior pronouncement.

One notable tweak is the reference to fiscal policy: “fiscal policy has become somewhat more restrictive” is how they put it.

Prior Fed statements have mentioned global risks and other outside forces, but monetary policy chieftains usually stay quiet on fiscal policy in these statements. We’re now in sequester land, of course, and it’s influencing the Fed’s forecasts.

Bernanke, in walking through the Fed’s deliberations, is putting disclaimers on the Fed’s bond-buying program. It can’t fully offset what fiscal policy is doing (tightening and slowing the economy) or what Bernanke called a “sharp increase in global financial stresses.” (Read: Europe)

Here we go, it’s Q&A time. The first one: What are you really looking for in “substantial” improvement in the labor market?

“We’ll be looking for sustained improvement in a range of key labor-market indicators,” he says, citing payrolls, unemployment, hiring rates and more. The Fed also will watch growth to look past short-term shocks.

Bernanke notes that the Fed “may adjust the purchases month to month” in its bond-buying to “appropriately accommodate” the Fed’s support for the economy.

Another couple of questions give Big Ben a chance to explain that point a little more. The Fed might adjust its purchases “as we make progress” in its objectives.

But his message is clear: it won’t be an immediate change, but designed to provide the market with some sense of how the Fed interprets the economy’s progress. If the economy gets worse after getting better, the Fed could adjust its bond-buying again.

“The point of this is to let the market see our behavior,” he says. That way the markets can anticipate a return to higher levels of purchases or the phasing out.

But no clues this time: “Obviously there has been improvement” in the labor market, but that’ll be a decision for the entire committee, he says. Bernanke says the Fed wants to make sure this is not temporary improvement, again.

It took 15 minutes to get to Cyprus and its reverberations, but we’re there.

“It’s a difficult situation in Cyprus,” Bernanke says, outlining its many problems and the uncertainty about its implications for others in Europe after Cypriot lawmakers rejected a bail-in plan Tuesday.

“The vote failed and the markets are up today. I don’t think the impact has been enormous. … We hope the Europeans will come up with an efficient and equitable solution.” The Fed is monitoring it, but so far doesn’t see much risk to the U.S., he says.

“Pretty recently,” he says. “I have a relative who is unemployed. I come from a small town in South Carolina that has taken a big hit from the recession.” Bernanke uses the opportunity to stress his concern about helping people who are unemployed.

The Fed’s analysis is in line with the Congressional Budget Office’s view, he says: federal fiscal restraint is cutting 1.5 percentage points off of growth.

“We take as given what the fiscal authorities are doing,” he says. Job creation and growth are weaker as a result, but “monetary policy cannot offset a fiscal restraint of that magnitude.” But he says long-term fiscal restraint is “extremely important” while paying attention to near-term concerns.

–ALL SYSTEMS GO: The Fed’s 6.5% unemployment threshold and its $85 billion bond-buying program remain in place. Its foot, in other words, remains pressed firmly on the accelerator.

–OKUN’S LAW STILL ON ITS BACK: The Fed slightly downgraded its forecast of growth in 2013 and 2014, predicting that output will grow between 2.3% and 2.8% in 2013 and between 2.9% and 3.4% in 2014. They shaved those forecasts down by 0.1 to 0.2 percentage points. At the same time, it presented slightly better unemployment forecasts for 2013 and 2014, predicting a jobless rate between 7.3% and 7.5% in 2013 and between 6.7% and 7.0% in 2014. Those projections were shaved by 0.1 to 0.3 percentage points. How could officials say growth will be worse but the job market better than previously expected? In part this is the Fed bowing to reality. The jobless rate has been coming down more than Okun’s Law–which lays out the relationship between growth and unemployment–implies it should. The Fed is effectively acknowledging that this rule of thumb–roughly a half percentage point decline in the unemployment rate for every percentage point above trend economic growth–isn’t working. One reason is people are leaving the labor force, so it takes less growth to get people looking for jobs to actually find them.

Bernanke says at least one member of the FOMC has suggested that the Fed “could lower even further the unemployment rate number” — the 6.5% unemployment threshold to start raising rates — but indicates the others are happy where they are.

Cyprus, again. The problems there don’t have direct implications for the U.S. and would only become a problem if the runs became contagious, Bernanke says.

Could a bank levy occur here? The FDIC created bank insurance in 1934 and has never lost a dime of anyone’s insured deposits, Bernanke notes. “During the crisis the response of the government was in fact to increase the level,” he says, adding that such a levy is “extremely unlikely in the United States.”

Bernanke, 1999: Monetary policy isn’t the right tool for addressing asset bubbles. Bernanke, January 2013: maybe it has a role. Elaborate, please?

Bernanke gets to point out that popping an asset bubble hits the entire economy. The Fed’s first lines of defense are supervision and regulation, and then Fed communications.

That being said, he says, given the experience of recent years “we at least need to take into account these issues as we make monetary policy.” What that means exactly “depends on the circumstances,” he says.

The thrust: in a weak economy, don’t mess around. In an expansion, maybe there’s an argument for making monetary policy tighter to address a bubble.

That’s a wrap, after just under one hour. ”The Fed Stays the Course” will be the headlines, but Bernanke did give us a peek at how the Fed might adjust its bond-buying as the economy picks up or falls back.

Be sure to check back here on Real Time Economics incessantly for all of our Fed coverage. Thanks for joining us.

Comments (5 of 7)

The Fed's job has been to forestall a systemic crack and keep asset values high enough to overcome the paradox of thrift. Despite extremely poor behavior by policymakers, a terrible foreign policy, and poor demographics the US finds itself on the brink of a positive energy independence led recovery. The Fed's job will be made easier by the millions of jobs created by this new recovery and the well communicated policy around support withdrawal should give investors ample time to adjust to higher interest rates. As the econmy improves in the quality of its composition, tax revenues and employement will recover nicely helpiing to reduce the fiscal imbalances of the last decade. We have lived through this before.

4:01 pm March 20, 2013

Anonymous wrote:

We are all tired of the pace of recovery but the Fed's job has been to buy enough time for the economy to organically recover. By keeping asset values up they stopped the paradox of thrift dilemma. Despite poor demographics, unbelievably irresponsible immature politicians, and a series of foreign policy blunders the US finds itself on the verge of an energy related recovery that will save our bacon. Not sure we deserve it but by buying us time the Fed gave us a chance to see the fruits of the last 5 years of energy development. It will be real economic growth that saves us not any monetarist policies. The quant easing has just kept us from a complete implosion which in this case was more than enough. Dealing with the last point, growth solves a multitude of sins. As the recovery improves it will be the composition of growth that improves not just the GDP figures and tax revenues and employment will improve..

2:57 pm March 20, 2013

awsmith46 wrote:

I fail to understand how a debt infusion will cause a failed economy to recover. This includes the US.

2:48 pm March 20, 2013

San Jose Bear wrote:

So:

Lower un-employment in a slow economy?

Translation: people giving up and leaving the work force = more welfare, more burden on the safety nets.

When, when, when do we raise tariffs and bring back basic manufacturing jobs? Far prefer to have a bit of old fashioned protectionism than higher taxes.

JMO

2:40 pm March 20, 2013

Michael Bland wrote:

The Fed has a terrible track record on projections. For example they have never predicted a recession. I would take all of these projections as what they are: guesses. Because of this, I would be concerned about them easing too long.

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.